What’s the least sexy thing you can think of right now? If we’re talking finance, it’s also one of the most important things. Inflation and hyperinflation.
Until recently, nobody wanted to talk about it because it sucks. Your money secretly disappears. What’s worse, is that it happens slowly so there’s no “crash” to talk about afterwards.
But after all is said and done, inflation is probably my biggest concern moving forward in my investing life.
- I’m an early retiree, my timelines are super long, and I don’t want to waste all my efforts. My investments have to last like 7 decades. That’s nuts!
- I don’t do anything risky or stupid so inflation (and maybe even hyperinflation) is really the only thing that can take me down.
- I think inflation is going to rise A LOT over the next while. And while I’m talking decades – not years – it’s worth paying attention to.
By the way, I’m not one to put on a sandwich board and yell that the sky is falling! Yes, I think it’s going to be bad, and there will be a stock market crash but I do think there’s an escape path. It’s the same as everything else – get enough money now so that even your income stops mattering, and then protect that money. Boom. Done.
So today we’ll look at:
- What is inflation, some myths, and some facts
- Why everything will start going up in price A LOT.
- And what to do about it.
I’ll also throw in some resources at the end if you’re curious about my action path.
Table of Contents
First, Inflation myths and facts
Fact: The Fed and most central banks target a 2% inflation when they do their policy setting. The premise is we need 2% inflation to encourage some spending and move the economy. Why is it 2% exactly, I don’t know – but it’s good to understand the target.
Myth: Government handouts will cause hyperinflation. No. Free money often just turns into stock market bubbles, but I will agree that people not working but getting free money forever spells MEGA inflation.
The government might keep up some payroll protection for a while, and that will cause inflation, but it’s a drop in the bucket of the greater picture and the future of inflation as I see it.
Let’s define inflation and hyperinflation
Inflation is the gradual increase in prices of goods and services or the overall decrease in the purchasing power of money. In general, inflation is aimed to be 2% per year.
Hyperinflation is an extremely rapid increase in prices of goods and services, going as high as 1000% per year.
So when your grandparents lament that they could buy a chocolate bar for a penny in the old days, that’s inflation. It would really suck if all they had were pennies as their savings. They would literally buy ZERO chocolate bars in today’s era.
Also, hyperinflation can occur when there is a rapid rise in paper currency without a rise in production of goods and services.
What else you need to know about inflation
- Low interest rates and quantitative easing (easy access to borrowing) are supposed to raise inflation. High rates and less access to borrowing stops inflation.
- Working people cause deflation. They create more goods than the money they get paid. (That’s the whole reason why they’re employed.) So if there’s more stuff than money being spent – it makes the stuff worth less. In essence there’s less global money per objects to buy.
- The converse of that is true too. Fewer working people – or more dependents – cause inflation. Yes, your tiny babies and your little ol’ grandparents may be cute but they’re also causing inflation.
- Cheap labor causes deflation. If you’re paying very little money to produce something, that product does not need to go up in price.
Is high inflation really that bad?
Yes it is. It’s no good for the average Joe like you and me, but the Fed very very much dislikes mega inflation. My cynical view is that they’re influenced by the ultra-rich. The ultra-rich have a lot of money and thus have A LOT to lose if that money starts being worth less.
But there might also be a simpler explanation like they care about people. Who knows.
In any case, those in power add pressure to keep inflation at that tranquil 2%. Wherever there was mega inflation or even hyperinflation, it didn’t happen overnight. Big macro economic movements take a long time to happen, it could be decades before we feel the real effect. And I’m not feeling too optimistic.
Why the future of inflation is not looking too good.
Reason 1 – Global demographics shift
Most countries are getting off-kilter when it comes to the proportion of working people to dependents, at least when it comes to age groups.
In the US, 16% of the population is over 65 (compared to 8% seventy years ago) and that trend is only rising. Over the whole world, 9% of people are over 65, compared to 5% seventy years ago.
As I mentioned earlier, more dependents means more inflation as there are fewer people producing goods, and more people consuming them.
In decades past, this used to be the opposite, and the central banks of the world were adding to the deflationary pressure.
Reason 2 – Decades of globalization
Even since the 70s, globalization of business has been a hot topic. Overall, more people working globally means less inflation.
Let’s look at China for a second. We’ve all kind of outsourced manufacturing to China. They have over a billion in population, mostly working, so that’s been a powerful deflation lever. Plus, China purposely made its currency weak and made labor SUPER cheap. Mega deflation once again.
However, China is now pivoting away from manufacturing and more towards service industry and tech which will stop deflation. And, even contributing to more inflation as their gargantuan population gets older. (Their 65+ demographic went from 4% to 12% over the past 70 years.) More on them later.
Reason 3 – Millennials
There’s a reason the boomers complain about us. We millennials kind of suck.
Now, not all the criticism is granted, but while our generation searches for meaningful and fulfilling ambitions, we’re less and less productive in the grand scheme of things. And once we start hitting our midlife crises in a decade or two, that’s a recipe for soul-searching non-productivity like you’ve never seen before.
There’s also one conspiracy theory that gets floated around. China planned this mega inflation to take over the world.
Maybe. But it doesn’t matter.
Yes, they have some big plans and seem pretty organized, but it shouldn’t change your course of action. If this is true, Western governments should have been smarter. Oops, too late now. There’s no point getting mad and it shouldn’t really change your course of action.
What to do when faced with mega inflation.
In essence, roll with it. But it helps if you’re prepared instead of having to react.
- Own things that can scale with inflation.
- Have a salary that scales with inflation by having an employable skill (as recommended by Warren Buffett.)
- Have some debt. Sound counter-intuitive? Well, if inflation causes your savings to be worth less, the same thing is true for your debt. But don’t have too much debt, because they might jack up interest rates. It’s a fine balancing act.
What does that mean in the real world?
These are my personal recommendations. (And after, scroll down to related reading to get more actionable details for each step.)
1 – Own rental properties.
It’s no secret that rentals are part of my own wealth strategy (see below.) Rent and home prices scale with inflation. Buy a rental now, and have a decent income when sh** hits the fan.
2 – Own farms.
Food prices are literally built into inflation. So once the price of everything goes up, farm income will be more and more profitable.
3 – Don’t buy into gold or bitcoin.
These won’t rise with inflation, and if you’re off by a few years they will have done nothing for you. Whereas a rental property will bring you increased rent AND scale up in price.
4 – Have some debt.
Most people find debt annoying, but imagine getting a huge spike in rent due to some sort of hyperinflation while your mortgage payments stay the same. Wahoo!
5 – But not too much variable debt.
The Fed’s last-ditch measure for balancing mega inflation is to raise interest rates. You don’t want to be caught with your pants down if your 1% mortgage rate suddenly becomes 10%!
TL;DR – inflation and hyperinflation.
- We’re definitely facing some pretty hefty inflation over the next few years and decades, but probably not hyperinflation.
- There are a number of reasons – including demographic shifts and globalization – that point to mega inflation
- Don’t get mad. Get prepared by following the advice above.